Long-overdue legal cover for IBC-buyers

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Published: December 13, 2019 4:15:50 AM

However, this paper has not been in favour of home buyers being accorded the status of financial creditors as it could lead to the process being stalled with vested interests taking over.

legal cover, IBC buyer,  Insolvency and Bankruptcy Code, nclt  In fact, the government has just initiated an amendment to prevent frivolous bankruptcy filings.

The government has done well to initiate an amendment to the Insolvency and Bankruptcy Code (IBC) that would shield prospective buyers of stressed assets from prosecution for offences committed by previous owners. In the absence of such protection, buyers were becoming apprehensive; indeed such a problem threatened to surface in the case of Bhushan Power and Steel. If the IBC has come such a long way, much of the credit must go to the NDA government for tweaking the rules of the code in timely fashion so as to protect the banks and ensure errant owners are not able to get their way. Had it not been for the government’s prompt action, many of the cases might not have been resolved, including the high profile Essar Steel case where the erstwhile promoters were trying to regain control of the business claiming they were eligible to do so. Again, in June 2018, the rules for related parties were tightened with the list being expanded to include many more relatives such as grand daughters and grandsons. Lenders have been empowered to approve a plan with just 66% of the voting share from 75% earlier facilitating speedy resolution.

However, this paper has not been in favour of home buyers being accorded the status of financial creditors as it could lead to the process being stalled with vested interests taking over. In fact, the government has just initiated an amendment to prevent frivolous bankruptcy filings. From now on, if any proceedings initiated by financial creditors such as homebuyers or bondholders, the application needs to be filed jointly by a minimum 100 creditors belonging to the same category or not less than 10% of the total number of such creditors, whichever is lower. Also, all allottees need to be beneficiaries of the same real estate project. This provision was badly needed to prevent a handful of creditors taking up the matter in the NCLT and disrupting any other solution. Along with the government, the Supreme Court (SC) too has played a key role in the evolution of the IBC. The apex court’s landmark judgement in the Essar Steel case re-established the primacy of secured financial lenders as the final arbiters of how sale proceeds from a stressed asset are to be distributed. The ruling came in the wake of operational creditors staking a claim to a bigger share of the spoils. The SC verdict was a big win for lenders, who despite their top place in the waterfall mechanism, were fighting other stakeholders. In fact, given how various benches of the NCLT have been interpreting the rules differently, it is important the SC weighs in on the matters from time to time. While the corporate insolvency resolution process (CIRP) has picked up pace with the total number of cases close to 2,550 in September, 2019, and every quarter since Q4FY17 having seen a rise in admissions, the bad news is that a very high number—23%—of the companies have been liquidated. In fact, just 42% of the value of claims admitted of `3.32 lakh crore has been realised by financial creditors. Recently, the framework of the IBC was expanded to include financial services providers, under Section 227, an excellent move given the crisis in the NBFC space. Although this is an interim measure, it highlights how responsive the government has been to the need of the hour.

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